A European response to the crisis: we’re finally there!
As we know, the COVID-19 pandemic has put a strain on the financial solidity of the entire European Union. It is clear that a massive plan is needed to overcome the crisis and revamp Europe’s competitiveness in the global stage and that only a coordinated and common response would have the chance to achieve this objective.
European institutions are aware of the challenge and have already put forward concrete proposals. This article is intended to be a summary of the main measures taken or proposed at the European level.
Initial measures
A great stimulus promptly came from the European Central Bank (ECB), which, on March 18th, launched a new bond-buying program, called Pandemic Emergency Purchase Programme. Essentially, the ECB committed on one hand to buy euro area sovereign bonds in the secondary market for an aggregate amount equal to a maximum of €750 billion (extended to €1350 billion on June 4th), thus avoiding that countries face unbearable risk premiums arising from the uncertainties due to the pandemic and allowing them to finance the needed emergency measures at relatively favorable conditions.
One the other hand, it made it easier for eurozone banks to finance themselves (with the aim of avoiding that the crisis turn into a credit crunch crisis) by easing their collateral requirements when in need of liquidity from the central bank.
The Council of the EU, instead, agreed on a package of measures aimed at helping the countries most in need. In particular:
European Stability System precautionary credit lines with minimal conditionalities attached are available for an amount of up to 2% of the country’s GDP. These are loans that Member States have the possibility to take out to finance healthcare-related expenses; they have a maturity of 10 years and an almost-zero interest rate.
A loan-based system, called SURE, was created to support Member States’ unemployment insurance, worth up to €100 billion, reimbursable under favorable conditions. It falls under the “re-insurance” category, as it does not substitute national unemployment insurance systems, but rather complements them by providing additional resources. As you may remember, we already talked about this as a desirable outcome of increased EU integration and a step forward a complete banking union.
Increased funding for the European Investment Bank (EIB) was agreed on, in the form of €25 billion worth of guarantees, in order to allow the EIB to extend loans to small and medium-sized enterprises, of up to €200 billion, across the EU and to foster economic growth as a result of increased liquidity availability to SMEs.
Member States agreed on the need to create a recovery fund, to “prepare and support the recovery”, but no decision on the details was taken at this point.
Measures for the future
Elaborating on the recovery fund idea, the European Commission has recently launched Next Generation EU, a new instrument through which the Commission will boost the EU budget with €750 billion – to be borrowed on financial markets in the 2021-2024 period.
It’s divided into three pillars, and we’ll summarize the main proposed measures for each of them.
Measures directly addressed to Member States:
The bulk of the funding will come through the establishment of the European Recovery and Resilience Facility. It will be used to finance investment and reforms, especially those aimed at speeding up the transition towards a digital and green economy. It has a budget of €560 billion, of which €310 will be distributed as grants and €250 billion as loans to Member States, focusing in particular on the most affected ones.
€55 billion of additional cohesion policy funding will be allocated through the REACT-EU (Recovery assistance for cohesion and the territories of Europe) program. They will take the form of grants to municipalities, hospitals, and companies that will be managed by Member States’ authorities to provide employment subsidies, short-time work schemes, youth employment measures, and liquidity and solvency support for SMEs. The funds will be allocated according to the economic and social impact each country or region is suffering.
In line with the objective to make Europe the first climate-neutral continent, €40 billion will be added to the Just Transition Fund to help Member States towards a green transition and €15 billion will enrich the European Agricultural Fund for Rural Development, to help rural areas make the structural changes that are necessary under the European Green Deal.
Measures addressed to private companies and to the fostering of private investment:
A new Solvency Support Instrument, equipped with €31 billion, will provide guarantees to the EIB in order to mobilise private capital and address private companies’ solvency concerns caused by the pandemic, in line with what was decided by the Council in April. The support will be provided especially to the most hit economic sectors in the countries where governments are less able to intervene through state aids.
€15.3 billion of increased InvestEU funding plus €15 billion for a new instrument called Strategic Investment Facility, will provide guarantees for investment projects via the EIB towards, for instance, sustainable infrastructure, digitalization, healthcare, and green technologies.
Measures addressing EU strategic goals:
A new health program, EU4Health, equipped with €9.4 billion, to be directed to investments in the healthcare system, to strengthen Europe’s capacity to respond to future crises.
€3.1 billion will be made available as part of increased funding for rescEU, the European Union Civil Protection Mechanism.
Other measures include, inter alia, humanitarian aid, increased funding for the Erasmus+ program and for the Common Agricultural policy.
How is Next Generation EU going to be financed?
We’ve said that the Commission will borrow on financial markets the required €750 billion on behalf of the Union, benefitting from its high ratings and thus from low interest rates.
To do this, the own resources decision will have to be amended to allow for the EU budget to be in deficit, as the rules currently in place mandate that the budget be in balance every year.
Clearly, this sum of money will have to be repaid over the years by Member States. To facilitate the repayment and ease the likely pressure on countries’ budgets, the Commission is proposing to establish new “own resources”, which are resources (e.g. tax revenues or transfers from Member States) to which the EU is entitled by law and which would not require appropriations by national parliaments through yearly budgets.
In addition to the traditional own resources (customs duties, contributions from Member States based on VAT and those based on gross national income), the Commission is proposing to reduce and eventually eliminate contribution reductions currently accorded to some Member States (namely, Austria, Germany, Denmark, the Netherlands, and Sweden), to introduce a digital tax for companies having a global annual turnover higher than €750 million, a tax based on the amount of non-recycled plastic packaging waste in each member state, a tax on carbon emissions and a contribution based on a common consolidated corporate tax base.
Commentary
The Commission has proven to be brave and able to take on the challenge posed by these difficult times. It has not stayed silent and has, instead, presented a comprehensive set of proposals that will intensify the European response to the recession, while at the same time accelerating the concrete implementation of the visionary Green Deal. Precisely what was expected from a strong, brilliant woman such as Ursula von der Leyen.
However, it is worth noting that the measures described in this article are, at this stage, proposals made by the Commission that will probably be subject to intense scrutiny and change in an effort to reach a compromise that will secure the required unanimity in the Council, as it is likely that the Frugal Four will oppose the program in its current form, especially for what concerns the proportion of grants and loans that will be provided through the European Recovery and Resilience Facility.
Moreover, the increased taxing capacity and financial autonomy the EU will have if the new own resources are approved, will inevitably imply that the process towards integration and development of the fiscal union will be deeper with respect to the current situation. Over the years it has become clear that there are Member States who oppose increased autonomy of the EU budget and the loss of national taxing power in favor of European institutions, so the new own resources will also probably be subject to bargaining.
Hopefully, it will not be too much of a watered-down compromise.
